Large-cap Funds

What are large-cap funds?

Large-cap equity funds are a type of equity mutual fund that invests a significant portion of its corpus in companies with large market capitalization.

Large-cap companies are well-established companies with a proven track record, stable profitability, strong corporate governance and good market presence for its products/services. These companies are known to have generated enough wealth for its investors over time and have the potential to create wealth at a steady pace in the future.

In 2017, the market regulator Securities and Exchange Board of India (SEBI) re-categorized its definition of large-cap, small-cap or mid-cap.

Based on the revised norms, the large-cap companies are the ones that fall in the top 100 ranks with reference to a pre-determined benchmark.

These companies are known for their stability. Thus, the funds that invest a significant portion in these companies are known to have low risk and offers reasonable yet relatively stable returns. Thus, one of the attributes that an investor should have while investing in these funds is being patient while having a long-term horizon.

Who should invest in large-cap funds?

Large-cap funds, as mentioned in the previous section, seek to invest in companies that are large. Thus, these funds aim to provide capital growth over time. Also, to capital growth, these funds try to distribute dividends regularly.

Thus, these funds are suitable for investors who are willing to participate in the equity market but are not ready to bear a high degree of volatility in returns. These funds are generally able to withstand the volatility of the market as the companies in which the fund is invested are known names of the industry and has passed phases in the market.

Thus, the primary objective of investing in such funds is to nullify the effect of loss that could arise by investing in a much riskier fund such as small-cap or mid-cap fund.

Large-cap funds are best suited for investors who are risk averse and are looking for equity exposure to high-quality stocks. For these funds, a long-term investment horizon of five to seven years is recommended.

Having said that, it nowhere means that these funds are entirely immune to market volatility. It just means that these funds are less prone to instability and can withstand a slowdown. Thus, to encapsulate, if you are looking for stability in your portfolio, or redemption within five years, then you should opt for large-cap equity mutual funds.

Factors to consider while investing in the large-cap funds

Following are the factors that you should look while investing in large-cap funds –

• Risk

Mutual fund investments are subjected to market risk so are these funds. But, the degree of uncertainty remains moderate in such funds unlike small-cap/mid-cap funds. This means the value of the fund also known as the Net Asset Value (NAV) does not fluctuate directly with the market or the benchmark movement. Thus, these funds provide stability to your investment portfolio.

• Return

Looking for 20 or 30 percent returns annually? Well, you may not get this high returns in large-cap equity funds, neither will you get a 30 percent return in the first year followed by a loss of 10 percent in the second year.

Generally, large-cap funds provide stable and sustained returns that is realistic. So, the profits will be less volatile and may not very high, but when looked at collectively throughout five years, the cumulative absolute value could be significant.

• Cost

Every mutual fund charges you a fee to manage the fund. The expense of operating a fund is called the expense ratio. The expense ratio is typically denoted as a percentage of the average asset under management (AUM) and reflects the operational efficiency of a fund. While SEBI has taken steps to reduce the expense ratio of funds by putting a cap on the upper limit a fund house can charge, you should be wary of the fee charged.

• Investment Horizon

As highlighted previously, large-cap equity funds are suitable for investors with a long-term investment horizon. The impact of short-term noise that may arise due to multiple factors is averaged out in the long-run of five to seven years. So, before investing ensure you have a vision of long-term growth and have the patience to unlock the potential.

• Financial Goals

Large-cap funds are suitable if you are looking to achieve your financial objective with a reasonable level of risk. These funds provide stable returns while keeping downward movement in check. These funds can be used to accumulate wealth for retirement, meeting children’s expenditure. In short, it can be used to accumulate wealth for critical financial goals where you would not want to take much risk.

How to identify the best large-cap fund?

We believe, as an investor, you should look at a fund both qualitatively and quantitatively. Thus, it is crucial that you evaluate some key financial ratios and also look at the fund from a management angle. Following are some of the critical parameters that you should examine before investing –

• Sharpe Ratio

Sharpe ratio measures the risk-adjusted return. If the ratio is higher, it means that for every unit of risk taken how much more returns you can expect. A high Sharpe ratio is good for a fund and indicates the superiority of a fund when compared to its peers.

• Standard Deviation

The Standard deviation is the measurement of dispersion from the mean value. In simple words, it measures volatility from the average rate of return.

A portfolio or stock having high standard deviation means that the price or value undergoes high fluctuation and is considered risky.

• Beta

Beta is the correlation with the market. It indicates the normal movement concerning the market. For example, a beta of 1.2 shows that is market offers 10% returns; the stock/portfolio will provide 12% returns. This doesn’t mean that a beta of 1.2 is good. Remember the additional 2% comes with risk and volatility. Thus, the ideal beta should be 1 for a portfolio, and it indicates that the portfolio is shielded from market movement.

• Alpha

Alpha is the excess returns when compared to the benchmark. This is the most important metric to assess when it comes to evaluating an actively managed mutual fund. Alpha indicates a fund manager’s ability to register profit and beat the benchmark. Remember, as an investor in the mutual fund; you are looking for higher returns than that of the benchmark. A higher alpha indicates a greater ability of the fund manager to generate profits.

Pros and Cons of Large Cap Mutual Funds

Pros

• One of the most significant advantages of large-cap funds is the stability that it can offer to the portfolio.
• Moderate returns but with low volatility.

Cons

• These funds are ideal for risk-averse investors. Thus, the returns may not be optimized.
• Limited growth potential of underlying stocks.
• Little or no control over the portfolio.

Top 10 large-cap funds

Following are the top large-cap funds that are worth looking at during 2019: